Buying commercial premises can be a major step for a business.
Whether you’re purchasing your first premises, expanding into a larger property, investing in commercial property or refinancing an existing mortgage, understanding how lenders assess a commercial mortgage application can help you prepare properly.
Commercial mortgages work differently from standard residential mortgages. Lenders will look at more than simply your personal income and credit history. Depending on the type of application, they may consider the property, your business, your experience, the proposed use of the premises and how the borrowing will be repaid.
This is where specialist advice can be particularly valuable.
At Mallard Commercial Finance, we help businesses, investors and property professionals explore commercial mortgage and wider commercial finance options, using our experience and access to a broad range of lenders.
In this guide, we’ll look at the key factors lenders consider when assessing a commercial mortgage application and what you can do to put yourself in the strongest possible position.
What is a commercial mortgage?
A commercial mortgage is a type of finance used to purchase or refinance property for business or investment purposes.
For example, a business could use a commercial mortgage to purchase:
- Office premises
- Retail units
- Industrial units
- Warehouses
- Workshops
- Business parks
- Other commercial property
Commercial mortgages can also be used by property investors purchasing commercial premises to generate rental income.
The exact lending criteria will vary between lenders, and the most suitable mortgage will depend on the individual circumstances of the borrower and the property.
What do lenders look for when assessing a commercial mortgage?
There isn’t one single checklist that every lender follows.
Different lenders have different criteria, and they can take different approaches to risk.
However, there are several key areas that are commonly important when assessing a commercial mortgage application.
1. The property
The property itself is one of the most important factors.
A lender will want to understand what they are being asked to lend against.
This can include:
- The type of property
- Its location
- Its current market value
- Its condition
- Its intended use
- The demand for similar properties
- Its potential resale value
For example, a well-established commercial property in an area with strong demand may be viewed differently from a highly specialised property with a limited market.
The intended use of the property can also be important.
A lender will want to understand whether the premises will be occupied by your business, rented to another business or used as part of an investment strategy.
2. Your business
If you’re purchasing premises for your own business, the lender will want to understand how the business operates and whether it is financially sustainable.
Depending on the circumstances, this can include looking at:
- Turnover
- Profitability
- Trading history
- Existing commitments
- Cash flow
- Business performance
- Future plans
A lender isn’t simply asking whether the business can afford the monthly repayments today. They need to be comfortable with the overall financial proposition and the ability to service the borrowing.
This is particularly relevant when a business is expanding or moving into larger premises.
A strong business plan can help demonstrate why the purchase makes commercial sense and how the additional premises will support future growth.
3. Your deposit or available equity
As with many forms of property finance, the amount you are able to contribute towards the purchase can be an important consideration.
The required deposit will depend on factors including the lender, property, borrower and overall application.
There isn’t a universal commercial mortgage deposit that applies to every transaction.
For some applications, the borrower may contribute cash towards the purchase. In other circumstances, existing property equity or other assets may form part of the overall funding structure.
The important point is to understand the total funding requirement at an early stage.
Remember that your budget needs to account for more than the purchase price. You may also need to consider costs such as:
- Valuation fees
- Legal costs
- Arrangement fees
- Stamp Duty Land Tax, where applicable
- Professional fees
- Any required works to the property
4. Your credit history
Credit history can form part of a commercial mortgage assessment, although it is not necessarily the only factor determining whether finance is available.
Lenders can have different attitudes towards previous credit issues.
Depending on the circumstances, they may consider:
- Missed payments
- Defaults
- County Court Judgements
- Historic arrears
- Existing borrowing
- Other financial commitments
A previous credit issue doesn’t automatically mean you cannot obtain commercial finance.
The nature, age and circumstances of any adverse credit can all be relevant, alongside the strength of the wider application.
This is an area where speaking to a specialist broker before making an application can be worthwhile.
5. Your experience
Experience can be particularly important for certain types of commercial property and investment.
For example, if you’re purchasing an investment property, a lender may want to understand your previous experience as a landlord or property investor.
For more specialist transactions, such as property development, relevant experience can also form part of the lender’s assessment.
That doesn’t necessarily mean that someone without previous experience cannot obtain finance.
It does mean that the lender may want to understand the proposal in more detail and consider what support, expertise or professional team is available around the transaction.
6. The purpose of the borrowing
Lenders will want to know why you’re applying for the commercial mortgage.
Are you:
- Buying premises for your own business?
- Purchasing an investment property?
- Expanding an existing business?
- Refinancing an existing commercial mortgage?
- Buying additional premises?
- Releasing capital?
- Purchasing a mixed-use property?
The purpose of the borrowing can influence which lenders and products are suitable.
For example, a business buying its own premises can have very different requirements from a property investor purchasing a commercial unit to let to a tenant.
This is one reason why commercial mortgages should be approached on a case-by-case basis.
7. The property’s rental income
If you’re buying commercial property as an investment, the potential rental income can be an important part of the lender’s assessment.
The lender will want to understand the income generated by the property and whether it provides sufficient coverage for the proposed borrowing.
They may consider factors such as:
- Current rental income
- Existing tenancy agreements
- Tenant strength
- Lease terms
- Rental value
- Property type
- Overall investment proposition
A property with a strong tenant and sustainable rental income may present a different proposition from one where rental income is uncertain or the property is currently vacant.
8. Your business plan and future projections
If you’re purchasing premises because your business is growing, lenders may want to understand your plans.
For example, perhaps you’re moving from a small office into a larger building because you need additional space for staff.
Or you may be purchasing a warehouse to support increased stock levels and expansion.
A clear business plan can help demonstrate:
- Why the property is required
- How the purchase supports the business
- How the business expects to grow
- How the mortgage repayments will be managed
- What your longer-term plans are
For newer or rapidly growing businesses, this can be particularly important.
9. The overall affordability of the borrowing
Ultimately, lenders need to establish whether the proposed borrowing is affordable.
The way affordability is assessed can vary depending on the type of commercial mortgage and the lender.
For an owner-occupied property, the lender may focus heavily on the business’s ability to service the debt.
For an investment property, rental income and the wider investment proposition can be particularly important.
This is why there isn’t a simple income multiple that applies to every commercial mortgage.
10. The exit strategy
Exit strategy is particularly important where a commercial mortgage forms part of a wider funding structure.
For a straightforward long-term commercial mortgage, the intention may simply be to repay the borrowing through the business’s ongoing income or rental income.
However, if your transaction involves bridging finance before the commercial mortgage, for example, the exit strategy becomes particularly important.
You need to understand how the short-term borrowing will be repaid and whether the proposed long-term mortgage is realistically achievable.
This is something Mallard Commercial Finance considers when helping clients structure commercial funding.
Can a new business get a commercial mortgage?
Yes, it may be possible, although newer businesses can face additional challenges compared with established businesses with a long trading history.
A lender may want to understand:
- The experience of the business owners
- The business plan
- Expected turnover and profitability
- The purpose of the property
- The deposit available
- The borrower’s wider financial position
- The overall strength of the proposition
For a new business, the experience of the people behind the company can be particularly relevant.
For example, someone who has operated successfully within an industry for many years but has recently established a new limited company may present a different proposition from someone entering an industry for the first time.
This is why commercial lending shouldn’t always be judged purely on how long a particular company has been trading.
Can you get a commercial mortgage if you are self-employed?
Being self-employed does not automatically prevent you from obtaining a commercial mortgage.
However, lenders will want to understand your financial position and the performance of your business.
The evidence required can vary depending on the lender and the circumstances.
This may include information such as:
- Company accounts
- Tax returns
- Bank statements
- Management accounts
- Business plans
- Details of existing borrowing
If your income or business structure is more complicated, a specialist commercial finance broker can help you understand which lenders may be more appropriate.
Can you get a commercial mortgage with bad credit?
Potentially.
Previous credit problems don’t automatically rule out commercial finance.
However, the details matter.
A lender may consider:
- What happened
- When it happened
- The amount involved
- Whether the issue has been resolved
- Your current financial position
- The strength of the business
- The property being offered as security
- The overall affordability of the proposed borrowing
Different lenders have different criteria, which means it can be important to understand the market before making an application.
Making multiple applications without understanding lender criteria can potentially make the situation more complicated.
What documents do you need for a commercial mortgage?
The exact documentation will vary depending on the lender and application, but you may be asked to provide information such as:
- Personal identification
- Business accounts
- Tax information
- Bank statements
- Details of existing borrowing
- Property details
- A business plan
- Details of the proposed purchase
- Evidence of rental income, where relevant
- Information about your deposit or available equity
For more complex transactions, additional information may be required.
Preparing your paperwork early can help prevent unnecessary delays once you have identified a suitable lender.
Commercial mortgage vs business loan: what’s the difference?
Commercial mortgages and business loans are both forms of business finance, but they are designed for different purposes.
A commercial mortgage is generally secured against property and is typically used to purchase or refinance commercial premises.
A business loan can be used for a wider range of business purposes and may be secured or unsecured, depending on the product.
The right option depends on what you are trying to achieve.
For example, if your primary objective is to purchase your own business premises, a commercial mortgage may be worth exploring.
If you need additional working capital for another business purpose, a different form of business finance could be more appropriate.
Should you use a commercial mortgage broker?
You can approach lenders directly, but commercial mortgages can be more complex than standard residential mortgages.
Different lenders can have significantly different criteria, particularly when dealing with:
- Specialist property
- New businesses
- Complex company structures
- Mixed-use property
- Investment property
- Unusual circumstances
- Previous credit issues
A commercial mortgage broker can help you understand the available options and identify lenders that may be suitable for your circumstances.
At Mallard Commercial Finance, we have access to a broad lender panel, including high-street banks and specialist lenders.
Our role is to understand the transaction first and then explore potential funding solutions, rather than trying to fit every client into the same product.
Common commercial mortgage mistakes to avoid
Applying to a lender before understanding their criteria
Not every lender will be suitable for every commercial property or borrower.
Understanding the likely criteria before making an application can help avoid wasted time and unsuitable applications.
Focusing only on the interest rate
The headline rate is important, but it isn’t the only consideration.
Fees, arrangement costs, flexibility, early repayment terms and the overall structure of the mortgage can all affect the suitability and cost of borrowing.
Underestimating the additional costs
Remember to budget for valuation, legal and other professional costs alongside the deposit and purchase price.
Not having a clear business case
If you’re buying premises for your business, be prepared to explain why the purchase makes sense and how it supports your future plans.
Assuming one lender’s decision represents the whole market
Commercial lenders can have very different criteria.
A decline from one lender does not necessarily mean that commercial finance isn’t available.
Mallard Commercial Finance: helping you find the right commercial mortgage
A commercial mortgage is a significant financial commitment, so finding the right funding structure is about more than simply securing a loan.
It’s about understanding the transaction, identifying potential challenges and finding a lender whose criteria are appropriate for the overall proposition.
Mallard Commercial Finance has extensive experience in commercial and specialist finance, with access to a broad range of lenders including high-street banks and specialist providers.
We work with business owners, property investors and other clients across a range of commercial finance requirements, helping them explore potential solutions based on their individual circumstances.
Whether you’re buying your first business premises, expanding, refinancing an existing commercial mortgage or investing in commercial property, our team can help you understand your options.
Thinking about a commercial mortgage?
If you’re considering purchasing or refinancing commercial property, speak to Mallard Commercial Finance about your requirements.
The earlier you understand your potential funding options, the easier it can be to plan your next move.
Frequently Asked Questions
What do lenders look for when applying for a commercial mortgage?
Lenders can consider a range of factors, including the property, its intended use, your business finances, your deposit or available equity, credit history, experience, affordability and the overall purpose of the borrowing.
How much deposit do I need for a commercial mortgage?
There is no single deposit requirement that applies to every commercial mortgage. The amount will depend on factors such as the lender, property, borrower, loan amount and overall strength of the application.
Can I get a commercial mortgage for my business premises?
Potentially. Commercial mortgages are commonly used to purchase or refinance premises occupied by a business. The lender will assess the business, property and affordability of the proposed borrowing.
Can a new business get a commercial mortgage?
It may be possible. A lender may consider factors including the experience of the business owners, business plan, financial projections, deposit, property and overall strength of the application.
Can I get a commercial mortgage with bad credit?
Potentially. The type, severity and age of previous credit issues will be relevant, alongside the property, financial position and wider circumstances. Different lenders have different criteria.
Can I get a commercial mortgage if I’m self-employed?
Being self-employed doesn’t automatically prevent you from obtaining a commercial mortgage. Lenders will generally want to understand your business and financial position, with the evidence required varying between lenders.
How long does it take to get a commercial mortgage?
Timescales vary considerably depending on the lender, property, complexity of the transaction and how quickly the necessary information and documentation can be provided. Specialist or more complex applications may require additional assessment.
What can a commercial mortgage be used for?
Commercial mortgages can potentially be used to purchase or refinance business premises and commercial investment properties. The exact options available will depend on the lender and circumstances.
Is a commercial mortgage the same as a business loan?
No. A commercial mortgage is generally secured against property and is primarily used for property purchase or refinancing. A business loan can be used for a wider range of business purposes and may be secured or unsecured.
Should I use a commercial mortgage broker?
You don’t have to use a broker, but specialist commercial lending can involve different criteria and lender approaches. A commercial mortgage broker can help you understand potential options and identify lenders that may be suitable for your circumstances.
